To say that Vladimir Putin threw a wrench into the global energy market this year is an understatement. Since Russia’s invasion of Ukraine in February, Putin’s favorite tool to erode support for the country has been energy. Russian energy companies have limited flows of natural gas to Europe, one of Russia’s biggest power customers, sending prices soaring and countries scrambling to identify replacements before winter hits.
Meanwhile, Russian oil and gas revenues have it shot itself, as countries around the world have been willing to pay a premium for higher volumes of Russian oil and gas. Putin has been threatening Europe for years with this kind of energy blackmail, but it was in 2022 when it became explicit.
However, there is a weakness in this strategy: Russia’s economy has stayed afloat because the energy market is highly globalized. This is how Putin’s aggression throughout 2022 could backfire spectacularly.
Since the fall of the Soviet Union in the 1990s and countries like Russia and China entering the global economy, energy has become a global commodity, oil above all, wrote Daniel Yergin, a historian of energy and vice president of S&P Global, in a Wall Street Journal opinion piece posted on monday. Major suppliers like Russia could count on countries anywhere in the world to buy their oil, providing a stable source of revenue that has boosted the country’s economy during years.
But the Ukrainian War and the West’s growing aversion to Russian energy imports may spell the end of the heyday of the international oil market, replaced by a significantly more fragmented and regionalized version where borders are defined by politics, Yergin argued.
“Europe’s ban on Russian oil, combined with the US-generated ‘cap’ on Russian oil prices, marks the end of the world oil market. Instead, there is a divided market whose borders are determined not only by economics and logistics, but also by geopolitical strategy,” he wrote.
Yergin argued that Russia could retaliate against new EU energy measures by cutting oil production and raising prices, further complicating things for nations that support Ukraine. But the fragmented and unpredictable nature of today’s oil market means the strategy could backfire spectacularly on Putin.
“Moscow will fight back, hoping to cause disruption, panic and a break in support for Ukraine. But Russia will have a tougher time than expected given the current market conditions,” Yergin wrote.
Undo Putin’s Playbook
before a strong show of unity Europe and the US, Russia has tried to take advantage of its status as a major global energy supplier to splinter in support of Ukraine. But the Western allies have so far managed to hold their ground.
Starting this month, the European Union, Russia largest historical energy customerstarted phasing out Russian oil imports, while the Group of Seven countries approved a oil price ceiling for Russian imports. For Putin, the West’s growing independence from Russian energy and a more fragmented global oil market in general could end up being a significant blow to the energy revenues on which Russia is increasingly dependent, and it could all be his doing.
The oil price cap, which Yergin called “ingenious,” was set at $60 a barrel, designed to keep Russian oil on the market while limiting the country’s revenue from crude oil and petroleum products. including gasoline and diesel, which in the first six months of the war had led to €102 billion ($108.6 billion) in revenue for Russia.
Putin has responded by calling for a price cap “idiotand the Kremlin has threatened to reduce Russian oil production 5-7% by early next year, driving up world prices and further depriving the West of energy. Earlier this month, officials even pointed to the country I would not sell oil to countries that have accepted the price cap.
With Western countries no longer reliable customers, Russia seems to have leaned towards the idea of a more regionalized oil market. in a interview Speaking to Saudi news channel Asharq last week, Russian Finance Minister Anton Siluanov said the country is actively “seeking new oil customers” in the wake of the Western oil price cap and that Russian oil companies are “diverting their supplies from the West to the East, South, other countries.”
But turning to a smaller oil market could hit Russia’s revenues if it decides to cut production, something analysts have warned Putin could do in a bid to raise oil prices and hurt the West.
“The Kremlin may cut exports to clear the ceiling and try to increase world oil prices,” researchers at Bruegel, a Brussels-based think tank, wrote in a recent article. report. “Even if cutting exports hurts Russia, the Kremlin may decide to do so as a sign of its willingness to suffer economic pain.”
But if Russia decides to cut oil production or exports, it could do Putin more harm than good, Yergin argued, by raising prices enough to drive away current Russian oil buyers, including China and China. India.
“Sharp Oil cuts and corresponding price increases would be felt not only in European countries, but also in those important to Russia, namely India and China, which together received about 70% of total transported crude oil exports. by sea from the country in December,” he wrote.
At the same time, the West may not feel the sting of high oil prices as much as Putin hopes. Even drawing again on strategic oil reserves may “not be necessary,” Yergin said, as the growing chances of a global recession in 2023 threaten to push oil demand down.
Yergin said that oil prices are volatile heading into 2023 in a interview with CNBC last week, but added that a “real recession” could drive prices down. In October, the World Bank also warned a recession could have an adverse effect on demand, warning that the “prospect of a global recession could lead to much weaker oil consumption.”
“A production cut could well end up adding to the Kremlin’s long list of miscalculations,” Yergin wrote.
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